UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SCHLUMBERGER N.V.
(SCHLUMBERGER LIMITED)
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number: (713) 513-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
SCHLUMBERGER LIMITED
Table of Contents
Second Quarter 2009 Form 10-Q
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1A.
Item 5.
Item 6.
2
SCHLUMBERGER LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Revenue
Interest & other income, net
Expenses
Cost of goods sold and services
Research & engineering
Marketing
General & administrative
Interest
Income from Continuing Operations before taxes
Taxes on income
Income from Continuing Operations
Discontinued Operations
Net Income
Net income attributable to noncontrolling interests
Net Income attributable to Schlumberger
Schlumberger amounts attributable to:
Basic earnings per share of Schlumberger:
Diluted earnings per share of Schlumberger:
Income from Discontinued Operations
Average shares outstanding:
Basic
Assuming dilution
See Notes to Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEET
ASSETS
Current Assets
Cash
Short-term investments
Receivables less allowance for doubtful accounts (2009—$149; 2008—$133)
Inventories
Deferred taxes
Other current assets
Fixed Income Investments, held to maturity
Investments in Affiliated Companies
Fixed Assets less accumulated depreciation
Multiclient Seismic Data
Goodwill
Intangible Assets
Deferred Taxes
Other Assets
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities
Estimated liability for taxes on income
Dividend payable
Long-term debt—current portion
Convertible debentures
Bank & short-term loans
Convertible Debentures
Other Long-term Debt
Postretirement Benefits
Other Liabilities
Equity
Common stock
Treasury stock
Retained earnings
Accumulated other comprehensive loss
Schlumberger stockholders’ equity
Noncontrolling interests
4
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Less: Income from discontinued operations
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization (1)
Non-cash postretirement benefits curtailment charge
Earnings of companies carried at equity, less dividends received
Deferred income taxes
Stock-based compensation expense
Provision for losses on accounts receivable
Other non-cash items
Change in assets and liabilities: (2)
Decrease (increase) in receivables
Increase in inventories
Increase in other current assets
(Decrease) increase in accounts payable and accrued liabilities
Decrease in estimated liability for taxes on income
Decrease in postretirement benefits
Other - net
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash flows from investing activities:
Capital expenditures
Multiclient seismic data capitalized
Business acquisitions, net of cash acquired
(Purchases) sale of investments, net
Other
NET CASH USED BY INVESTING ACTIVITIES
Cash flows from financing activities:
Dividends paid
Proceeds from employee stock purchase plan
Proceeds from exercise of stock options
Tax benefits on stock options
Stock repurchase plan
Proceeds from issuance of long-term debt
Repayment of long-term debt
Net decrease in short-term debt
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Cash flow from discontinued operations - operating activities
Net increase (decrease) in cash before translation effect
Translation effect on cash
Cash, beginning of period
Cash, end of period
5
CONSOLIDATED STATEMENT OF EQUITY
January 1, 2008 - June 30, 2008
Balance, January 1, 2008
Comprehensive income
Net income
Currency translation adjustments
Changes in fair value of derivatives
Deferred employee benefits liabilities, net of tax
Total comprehensive income
Shares sold to optionees, less shares exchanged
Shares granted to directors
Stock-based compensation cost
Shares issued on conversion of debentures
Dividends declared ($0.42 per share)
Balance, June 30, 2008
January 1, 2009 - June 30, 2009
Balance, January 1, 2009
Vesting of restricted stock
Acquisition of noncontrolling interest
Balance, June 30, 2009
6
SHARES OF COMMON STOCK
Employee stock purchase plan
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements, which include the accounts of Schlumberger Limited and its subsidiaries (“Schlumberger”), have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. All intercompany transactions and balances have been eliminated in consolidation. Operating results for the six-month period ended June 30, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009. The December 31, 2008 balance sheet information has been derived from the audited 2008 financial statements. For further information, refer to the Consolidated Financial Statements and notes thereto, included in the Schlumberger Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 11, 2009.
Subsequent events have been evaluated through July 29, 2009, which is the date the financial statements were issued.
Recently Adopted Accounting Pronouncement
Effective January 1, 2009, Schlumberger adopted SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS 160”). This standard changed the accounting for and reporting of minority interests (now referred to as noncontrolling interests). Noncontrolling interests are now classified as equity in the Schlumberger financial statements.
SFAS 160 also changed the way the consolidated income statement is presented by requiring net income to include the net income for both the parent and the noncontrolling interests, with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share continues to be based on income amounts attributable to the parent.
As a result of the adoption of SFAS 160, prior period amounts related to noncontrolling interests have been reclassified to conform to the current period presentation.
2. Charges
Schlumberger recorded the following charges during the second quarter of 2009:
Schlumberger continued to reduce its global workforce as a result of the slowdown in oil and gas exploration and production spending and its effect on activity in the oilfield services sector. As a result of these actions, Schlumberger recorded a pretax charge of $102 million ($85 million after-tax), which is classified in Cost of goods sold and services in the Consolidated Statement of Income. Approximately $57 million of the charge remained unpaid as of June 30, 2009, most of which is expected to be paid during the third quarter of 2009.
As a consequence of these workforce reductions, Schlumberger recorded pretax non-cash pension and other postretirement benefit curtailment charges of $136 million ($122 million after-tax). These costs are classified in Cost of goods sold and services in the Consolidated Statement of Income. Refer to Note 15 – Pension and Other Postretirement Benefits for further details.
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The following is a summary of these charges:
Charges
- Workforce reductions
- Postretirement benefits curtailment
3. Earnings Per Share
The following is a reconciliation from basic earnings per share of Schlumberger from continuing operations to diluted earnings per share of Schlumberger from continuing operations:
Second Quarter
Assumed conversion of debentures
Assumed exercise of stock options
Unvested restricted stock
Diluted
Six Months
The number of outstanding options to purchase shares of Schlumberger common stock which were not included in the computation of diluted earnings per share, because to do so would have had an antidilutive effect, were as follows:
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4. Acquisitions
During the first six months of 2009, Schlumberger made certain acquisitions and minority interest investments, none of which were significant on an individual basis, for an aggregate amount of $198 million, net of cash acquired.
5. Inventory
A summary of inventory follows:
Raw materials & field materials
Work in process
Finished goods
6. Fixed Assets
A summary of fixed assets follows:
Property, plant & equipment
Less: Accumulated depreciation
Depreciation expense relating to fixed assets was as follows:
7. Multiclient Seismic Data
The change in the carrying amount of multiclient seismic data for the six months ended June 30, 2009 was as follows:
Balance at December 31, 2008
Capitalized in period
Charged to cost of goods sold and services
Balance at June 30, 2009
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8. Goodwill
The changes in the carrying amount of goodwill by business segment for the six months ended June 30, 2009 were as follows:
Additions
Impact of change in exchange rates
9. Intangible Assets
Intangible assets principally comprise software, technology and customer relationships. The gross book value and accumulated amortization of intangible assets were as follows:
Software
Technology
Customer Relationships
Amortization expense charged to income was as follows:
The weighted average amortization period for all intangible assets is approximately 12 years.
Based on the net book value of intangible assets at June 30, 2009, amortization charged to income for the subsequent five years is estimated to be: remainder of 2009 – $59 million; 2010 – $106 million; 2011 – $97 million; 2012 – $89 million; 2013 – $74 million and 2014 – $68 million.
10. Derivative Instruments and Hedging Activities
Schlumberger is exposed to market risks related to fluctuations in foreign currency exchange rates, commodity prices and interest rates. To mitigate these risks, Schlumberger utilizes derivative instruments. Schlumberger does not enter into derivatives for speculative purposes.
Foreign Currency Exchange Rate Risk
As a multinational company, Schlumberger conducts its business in approximately 80 countries. Schlumberger’s functional currency is primarily the US dollar, which is consistent with the oil and gas industry. However, outside the United States, a significant portion of Schlumberger’s expenses is incurred in foreign currencies.
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Therefore, when the US dollar weakens (strengthens) in relation to the foreign currencies of the countries in which Schlumberger conducts business, the US dollar – reported expenses will increase (decrease).
Schlumberger is exposed to risks on future cash flows to the extent that local currency expenses exceed revenues denominated in local currency that are other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to provide a hedge against a portion of these cash flow risks. These contracts are accounted for as cash flow hedges under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), with the effective portion of changes in the fair value of the hedge recorded on the Consolidated Balance Sheet and in Other Comprehensive Income (Loss). Amounts recorded in Other Comprehensive Income (Loss) are reclassified into earnings in the same period or periods that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of the hedged item is recorded directly to earnings.
At June 30, 2009, Schlumberger recognized a cumulative net $52 million gain in Equity relating to revaluation of foreign currency forward contracts and foreign currency options designated as cash flow hedges at June 30, 2009.
Schlumberger is also exposed to changes in the fair value of assets and liabilities, including certain of its long-term debt, which are denominated in currencies other than the functional currency. Schlumberger uses foreign currency forward contracts and foreign currency options to hedge this exposure as it relates to certain currencies. These contracts are accounted for as fair value hedges under the provisions of SFAS No. 133, with the fair value of the contracts recorded on the Consolidated Balance Sheet and changes in the fair value recognized in the Consolidated Statement of Income along with the change in fair value of the hedged item.
At June 30, 2009, contracts were outstanding for the US dollar equivalent of $4.9 billion in various foreign currencies. These contracts expire on various dates during the next twelve months.
Commodity Price Risk
Schlumberger is exposed to the impact of market fluctuations in the price of commodities, such as copper and lead. Schlumberger has entered into forward contracts on these commodities to manage the price risk associated with forecasted purchases. The objective of these contracts is to reduce the variability of cash flows associated with the forecasted purchase of those commodities. These contracts do not qualify for hedge accounting treatment under the provisions of SFAS No. 133 and therefore, changes in the fair value of the forward contracts are recorded directly to earnings.
Interest Rate Risk
Schlumberger is subject to interest rate risk on its debt and its investment portfolio. Schlumberger maintains an interest rate risk management strategy that generally does not involve derivatives and instead primarily uses a mix of variable and fixed rate debt combined with its investment portfolio to mitigate the exposure to changes in interest rates. At June 30, 2009, Schlumberger had fixed rate debt aggregating approximately $3.6 billion and variable rate debt aggregating approximately $2.2 billion.
Schlumberger’s exposure to interest rate risk associated with its debt is also partially mitigated by its investment portfolio. Both Short-term investments and Fixed income investments, held to maturity, which totaled approximately $4.7 billion at June 30, 2009, are comprised primarily of money market funds, eurodollar time deposits, certificates of deposit, commercial paper, euro notes and Eurobonds, and are substantially all denominated in US dollars.
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The fair values of outstanding derivative instruments is summarized as follows:
Classifications
Derivative assets
Derivative designated as hedges:
Foreign exchange contracts
Derivative not designated as hedges:
Commodity contracts
Derivative Liabilities
The fair value of all outstanding derivatives are determined using a model with inputs that are observable in the market or can be derived from or corroborated by observable data.
The effect of derivative instruments designated as fair value hedges and not designated as hedges on the Consolidated Statement of Income was as follows:
Classification
Derivatives designated as fair value hedges:
Derivatives not designated as hedges:
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The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) was as follows:
11. Other Financial Instruments
Both Short-term investments and Fixed Income Investments, held to maturity are comprised primarily of money market funds, eurodollar time deposits, certificates of deposits, commercial paper, euro notes and Eurobonds, and are substantially denominated in US dollars. The carrying value of these investments approximates fair value, which was estimated using quoted market prices for those or similar investments.
A summary of Long-Term Debt follows:
5.25% Guaranteed Notes due 2013
6.5% Notes due 2012
5.875% Guaranteed Bonds due 2011
5.14% Guaranteed Notes due 2010
4.50% Guaranteed Notes due 2014
Commercial paper borrowings
Other variable rate debt
At both June 30, 2009 and December 31, 2008, there were $321 million outstanding of 2.125% Series B Convertible Debentures due June 1, 2023. On June 1, 2010, holders may require Schlumberger to repurchase their Series B debentures for cash. Accordingly, these debentures are classified within Current Liabilities on theConsolidated Balance Sheet at June 30, 2009. The fair value of these Series B debentures at June 30, 2009 and December 31, 2008 was $474 million and $398 million, respectively. For further information regarding the debentures refer to Note 11 to the Consolidated Financial Statements included in the Schlumberger Annual Report on Form 10-K for the year ended December 31, 2008.
The fair value of Schlumberger’s fixed rate Long-Term Debt was estimated based on quoted market prices.
During the first quarter of 2009, a subsidiary of Schlumberger entered into a €3.0 billion Euro Medium Term Note program which is guaranteed by Schlumberger Limited. This program provides for the issuance of various types of debt instruments such as fixed or floating rate notes in Euro, US dollar or other currencies. Schlumberger issued €1.0 billion 4.50% Guaranteed Notes due 2014 in the second quarter under this program. Schlumberger entered into agreements to swap these Euro notes for US dollars on the date of issue until maturity, effectively making this a US dollar denominated debt on which Schlumberger will pay interest in US dollars at a rate of 4.95%.
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12. Income Tax
Income from Continuing Operations before taxes which were subject to US and non-US income taxes was as follows:
United States
Outside United States
During the second quarter of 2009, Schlumberger recorded pretax charges of $73 million in the US and $165 million outside of the US. These charges are included in the above table and are more fully described in Note 2 – Charges.
The components of net deferred tax assets were as follows:
Postretirement benefits, net
Multiclient seismic data
Intangible assets
Other, net
The above deferred tax assets at June 30, 2009 and December 31, 2008 are net of valuation allowances relating to net operating losses in certain countries of $195 million and $197 million, respectively. The deferred tax assets are also net of valuation allowances relating to a capital loss carryforward of $139 million at June 30, 2009 ($140 million at December 31, 2008), of which $123 million expires in 2009 and $16 million expires in 2010, and a foreign tax credit carryforward of $49 million at June 30, 2009 ($49 million at December 31, 2008) of which $3 million expires in 2009, and $46 million expires in years 2010 through 2017.
The components of consolidated Taxes on income were as follows:
Current:
United States - Federal
United States - State
Deferred:
Valuation allowance
Consolidated taxes on income
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A reconciliation of the US statutory federal tax rate of 35% to the consolidated effective income tax rate follows:
US federal statutory rate
Non-US income taxed at different rates
Effect of equity method investment
Effective income tax rate
13. Contingencies
In July 2007, Schlumberger received an inquiry from the United States Department of Justice (“DOJ”) related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. Schlumberger is cooperating with the DOJ and is continuing its own investigation with respect to these services.
Schlumberger and its subsidiaries are party to various legal proceedings from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. At this time the ultimate disposition of these proceedings is not determinable and therefore, it is not possible to estimate the amount of loss or range of possible losses that might result from an adverse judgment or settlement in any of these matters. However, in the opinion of management, any liability that might ensue would not be material in relation to Schlumberger’s consolidated liquidity, financial position or future results of operations.
14. Segment Information
Schlumberger operates two business segments: Oilfield Services and WesternGeco.
Oilfield Services
North America
Latin America
Europe/CIS/Africa
Middle East & Asia
WesternGeco
Corporate & Other
Interest Income (1)
Interest Expense (2)
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15. Pension and Other Postretirement Benefits
Net pension cost for the Schlumberger pension plans included the following components:
Service cost—benefits earned during period
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of prior service cost
Amortization of net loss
Curtailment charge
During the first six months of 2009, Schlumberger made contributions to its US and international defined benefit pension plans of $212 million and $290 million, respectively.
Schlumberger currently anticipates contributing approximately $300 million to its defined benefit pension plans during the last six months of 2009.
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The net periodic benefit cost for the Schlumberger US postretirement medical plan included the following components:
Interest cost on accumulated postretirement benefit obligation
Due to the actions Schlumberger has taken to reduce its global workforce (See Note 2 – Charges), Schlumberger experienced a significant reduction in the expected aggregate years of future service of its employees in certain of its pension plans and its postretirement medical plan. Accordingly, Schlumberger recorded a curtailment charge of $136 million during the second quarter of 2009. The curtailment charge includes recognition of the change in benefit obligations as well as a portion of the previously unrecognized prior service costs, reflecting the reduction in expected future service for the impacted plans.
As a result of the curtailment, Schlumberger performed a remeasurement of the impacted plans using a discount rate of 7.25% (as compared to 6.50% at December 31, 2008). All other significant assumptions remained unchanged from the December 31, 2008 measurement date. The curtailment and remeasurement resulted in a net decrease in Schlumberger’s liability forPostretirement Benefits of $361 million.
16. Discontinued Operations
During the first quarter of 2008, Schlumberger recorded an after-tax gain of $38 million relating to a previously disposed of business that was accounted for as a discontinued operation.
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BUSINESS REVIEW
Second Quarter 2009 Compared to First Quarter 2009
Pretax Operating Income
Pretax operating income represents the segments’ income before taxes and noncontrolling interest. The pretax operating income excludes such items as corporate expenses and interest income and interest expense not allocated to the segments as well as the charges described in detail in Note 2 to the Consolidated Financial Statements, amortization of certain intangible assets, interest on postretirement medical benefits and stock-based compensation costs.
Second quarter 2009 revenue was $5.53 billion versus $6.00 billion in the first quarter of 2009. Income from continuing operations attributable to Schlumberger for the second quarter of 2009 was $613 million compared to $938 million in the first quarter of 2009. The second quarter 2009 results included after-tax charges of $207 million related to workforce reductions and postretirement benefits curtailment.
Compared to the first quarter, the overall sequential rate of revenue decline slowed as a further precipitous drop in North America was offset by slowing rates of decline and some recovery in other parts of the world. In Russia, revenue recovered noticeably due to seasonal trends and improving activity. North American gas drilling in both the US and Canada reached a five-year low as demand remained weak and storage remained at levels significantly above seasonal averages. While production has begun to show some decline and summer demand has been strong, it will still require a further substantial increase in demand to stimulate and sustain higher levels of drilling. This is not anticipated to happen before 2010. At WesternGeco, there was some recovery in Multiclient sales both in North America and overseas, although this, together with increased activity in Land, was offset by weaker Marine revenue. Marine pricing continued to decline due to excess capacity in the market. Several new marine and land contracts were booked during the quarter giving better visibility on the next few months, however, multiclient sales remain difficult to forecast until there is better visibility on year-end oil prices.
Schlumberger’s outlook for the remainder of 2009 assumes some stability but no major increase in the North American natural gas rig count and as a result service pricing is expected to remain depressed. Overseas, further activity declines are expected to occur but be limited and the pricing concessions made in the first half of the year are expected to affect revenues in the second half. The current volatility in the oil price makes it unlikely that customers will sanction any major increases in expenditures.
Schlumberger is aware that a number of projects are continuing to be postponed or cancelled and is also concerned that the higher finding and development costs of new supply, coupled with lower oil and gas prices and more restrictive credit markets are stifling investment flows. This situation, if it persists, will lead to inadequate supply when demand growth returns. The shape of the economic recovery beyond 2009 and the consequent recovery in oil and gas demand remain the determining factors for future activity increases.
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OILFIELD SERVICES
Second quarter revenue of $4.96 billion was 9% lower sequentially driven by a 31% fall in North America moderated by a 3% decline internationally. The significant drop in North America revenue resulted primarily from a further decrease in activity in the US Land GeoMarket*, the impact of spring break-up and generally reduced drilling activity in Canada, and additional pricing erosion across the Area. The reduction in revenue across the other Areas was primarily due to lower overall activity levels, although improvements were noted in Russia, East Asia and Mexico/Central America. Across all Areas, revenue declines were most significant in Well Services, Drilling & Measurements and Wireline activities.
Sequentially, second quarter pretax operating income of $1.02 billion was down 19%. Pretax operating margin decreased 245 basis points (bps) sequentially to 20.6% primarily due to the impact of the severe reduction in activity and pricing in North America and the overall lower level of international activity.
Revenue of $819 million was 31% lower compared to the first quarter of 2009. Pretax operating income of $8 million decreased 95% versus the first quarter of 2009.
The US Land GeoMarket recorded a further steep drop in revenue as rig count declined approximately 27% and pricing continued to erode. Canada GeoMarket revenue also dropped significantly due to the impact of the seasonal spring break-up, a general reduction in land drilling activity and significant pricing pressure. US Gulf of Mexico revenue fell modestly as lower pricing and a further weakening in shelf drilling activity were partially offset by slightly higher deepwater activity.
Pretax operating margin decreased sequentially by 12.7 percentage points to 1.0% on the heavy pricing pressure across most of the Area and the sharp drop in activity primarily in the US Land and Canada GeoMarkets.
Revenue of $995 million was 3% lower than the previous quarter. Pretax operating income of $176 million was 13% lower sequentially.
Sequentially, Area revenue decreased primarily as the result of significantly lower activity and the deferral of revenue pending finalization of certain contracts in the Venezuela/Trinidad & Tobago GeoMarket. This decrease, however, was partially offset by an increase in the Mexico/Central America GeoMarket from higher Integrated Project Management (IPM) project efficiency and activity.
Pretax operating margin decreased 206 bps sequentially to 17.6% primarily due to a less favorable revenue mix coupled with higher operating costs in the Brazil GeoMarket; currency revaluation losses and pricing pressure in the Peru/Colombia/Ecuador GeoMarket; and the impact of the lower activity in the Venezuela/Trinidad & Tobago GeoMarket. These decreases were partially offset by increased IPM project efficiency and activity in Mexico/Central America.
Revenue of $1.78 billion was 1% lower sequentially. Pretax operating income of $432 million was 8% lower than the previous quarter.
Russia revenue increased on the seasonal rebound of offshore activities in the East and generally improved activity levels in East and West Siberia as well as through higher sales of Artificial Lift and Completions products. The North Africa GeoMarket also increased on strong demand for Testing Services technologies and
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Completions products. These increases were offset by lower revenue in the Nigeria & Gulf of Guinea and the West & South Africa GeoMarkets due to reduced activity levels that mainly impacted Drilling & Measurements and Wireline services. The Caspian and North Sea GeoMarkets were down primarily due to reduced demand for Drilling & Measurements and Well Services technologies. Sequentially, revenue also declined in the Continental Europe GeoMarket due to lower Schlumberger Information Solutions (SIS) software sales as well as reduced demand for Drilling & Measurements, Wireline and Testing Services technologies.
Pretax operating margin of 24.2% dropped 172 bps sequentially, primarily due to the lower activity levels and a less favorable revenue mix in the Nigeria & Gulf of Guinea, West & South Africa and North Sea GeoMarkets. These decreases, however, were partially offset by the improving activity levels in Russia.
Revenue of $1.31 billion was 5% lower sequentially. Pretax operating income of $421 million was 8% lower than the previous quarter.
Sequentially, revenue decreased primarily due to lower activity in the Gulf GeoMarkets as well as in the East Mediterranean, Arabian, Indonesia, Australia/Papua New Guinea and India GeoMarkets. Pricing pressure also began to impact revenue. These decreases were partially offset by an increase in revenue in the East Asia GeoMarket on strong exploration-related demand for Testing Services, Wireline and Well Services technologies and a rebound in activity in the China/Japan/Korea GeoMarket following the winter slowdown in the prior quarter.
Pretax operating margin slipped 107 bps sequentially to 32.1% primarily as the result of the lower overall activity in the Area.
WESTERNGECO
Second quarter revenue of $559 million increased 1% versus the first quarter of 2009. Pretax operating income of $97 million increased 77% sequentially.
Multiclient revenue improved primarily in North America due to increased sales of the E-Octopus surveys, and in the North Sea following the announcement of licensing round awards. Land revenue increased slightly with the start of a new project in Asia. These increases were partially offset by a decrease in Marine revenue on weaker activity.
Pretax operating margin increased 7.4 percentage points to 17.3% sequentially primarily due to higher Multiclient sales and improved profitability in Marine as cost reduction initiatives more than offset the impact of the lower revenue.
Total backlog was $1.2 billion at the end of the quarter compared to $1.5 billion at the end of the first quarter 2009 and $1.8 billion at December 31, 2008.
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Second Quarter 2009 Compared to Second Quarter 2008
Second quarter 2009 revenue was $5.53 billion versus $6.75 billion in the second quarter of 2008.
Income from continuing operations attributable to Schlumberger was $613 million in the second quarter of 2009 as compared to $1.42 billion in the second quarter of 2008. The second quarter 2009 results included after-tax charges of $207 million related to workforce reductions and postretirement benefits curtailment.
Second quarter 2009 revenue of $4.96 billion was 18% lower compared to the same period last year with declines in all Areas. North America revenue was down as low natural gas prices resulted in a significant drop in activity and associated pricing pressure. Europe/CIS/Africa revenue decreased primarily due to the weakening of local currencies against the US dollar and lower activity in the North Sea and Russia as the result of lower customer spending. Middle East & Asia revenue was lower due to reduced activity throughout most of the Area. Latin America revenue decreased as a result of the sharp drop in activity in Venezuela/Trinidad & Tobago and the weakening of local currencies against the US dollar. Across the Areas, revenue declines were heaviest in Well Services, Wireline and Drilling & Measurements activities.
Second quarter 2009 pretax operating income of $1.02 billion was 40% lower year-on-year. Pretax operating margin declined 746 bps to 20.6% compared to the second quarter of 2008 due to the significant drop in activity and pricing pressure in North America as well as the lower overall activity coupled with a less favorable revenue mix internationally.
Second quarter 2009 revenue of $819 million was 43% lower year-on-year. US Land and Canada revenue decreased significantly as lower natural gas prices and a lack of available credit for some customers resulted in a sharp decrease in activity coupled with heavy pricing pressure. Canada revenue was adversely impacted by the weakening of the Canadian dollar against the US dollar. The US Gulf of Mexico revenue decreased on weaker shelf drilling activity and lower pricing.
Year-on-year, pretax operating margin decreased 23.0 percentage points to 1.0%, primarily due to the impact of lower activity across the Area and the related pricing erosion.
Second quarter 2009 revenue of $995 million was 6% below the same period last year primarily as the result of significantly reduced activity in Venezuela/Trinidad & Tobago and the weakening of local currencies against the US dollar. Peru/Colombia/Ecuador revenue also decreased on lower gain share in IPM projects as well as
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reduced demand for Drilling & Measurements and Wireline services while Argentina/Bolivia/Chile decreased on reduced demand for Well Services and Drilling & Measurements technologies and Data & Consulting Services. These decreases were partially offset by increases in Mexico/Central America on higher IPM project activity and in Brazil due to stronger exploration related activities that resulted in demand for Wireline, Testing Services and Drilling & Measurement technologies.
Year-on-year, pretax operating margin was down 537 bps to 17.6% primarily due to the impact of the severe drop in activity in Venezuela/Trinidad & Tobago as well as the reduced gain share and pricing erosion in Peru/Colombia/Ecuador.
Second quarter 2009 revenue of $1.78 billion was 14% lower year-on-year primarily as the result of the weakening of local currencies against the US dollar. Additionally, revenue decreased in Russia and the North Sea on lower activity resulting from reduced customer spending, and from the associated pricing pressure. Nigeria & Gulf of Guinea revenue was lower on a decrease in demand for Drilling & Measurements, Testing Services and Wireline technologies while Framo revenue was also lower. These decreases were partially offset by an increase in Libya on commencement of exploration-related activities and higher demand for Artificial Lift and Completion products.
Year-on-year, pretax operating margin decreased by 394 bps to 24.2% primarily as the result of the lower overall activity and a less favorable revenue mix in the North Sea, Nigeria & Gulf of Guinea, and West & South Africa.
Second quarter 2009 revenue of $1.31 billion was 9% below the same period last year. Revenue in the Australia/Papua New Guinea and Arabian GeoMarkets decreased on lower exploration-related activity which resulted in reduced demand for Testing Services, Wireline, Well Services and Drilling & Measurements technologies. The China/Japan/Korea GeoMarket was lower on reduced demand for Drilling & Measurements services and Artificial Lift products while the East Mediterranean GeoMarket dropped on decreased demand for Drilling & Measurements and Well Services technologies.
Year-on-year, pretax operating margin decreased 428 bps to 32.1% primarily due to the lower activity coupled with a less favorable revenue mix in the Arabian, Gulf, Indonesia, East Mediterranean and Australia/Papua New Guinea GeoMarkets.
Second quarter 2009 revenue of $559 million was 17% lower year-on-year. Marine revenue decreased as the result of reduced activity and increased vessel dry docks and transits. Multiclient revenue was down primarily due to reduced sales in North America. Land revenue was also below the same period last year mostly as the result of the completion of contracts in Latin America.
Year-on-year, pretax operating margin decreased 11.9 percentage points to 17.3% primarily due to the impact of the reduced activity in Marine and lower Multiclient sales. However, these decreases were partially offset by an improvement in Land as cost reductions more than offset the lower activity.
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Six Months 2009 Compared to Six Months 2008
Six month revenue for the period ended June 30, 2009 was $11.53 billion versus $13.04 billion for the same period last year. Income from continuing operations attributable to Schlumberger was $1.55 billion in the first six months of 2009 as compared to $2.72 billion for the same period in 2008. Results for the first six months of 2009 included after-tax charges of $207 million related to workforce reductions and postretirement benefits curtailment.
Six month revenue of $10.40 billion was 11% lower compared to the same period last year. North America revenue was down significantly as low natural gas prices resulted in a steep drop in activity and heavy pricing pressure in much of the Area. Europe/CIS/Africa revenue decreased primarily on the weakening of local currencies against the US dollar and lower activity in the North Sea and Russia due to reduced customer spending. Middle East & Asia revenue decreased as the result of lower activity primarily in the Asia GeoMarkets. These decreases were partially offset by an increase in Latin America revenue primarily due to higher IPM activity in Mexico/Central America and offshore activity in Brazil but partially offset by lower activity in Venezuela & Trinidad & Tobago and the impact of weakening local currencies in the Area against the US dollar.
Pretax operating margin decreased 556 bps to 21.9% as a result of the significant drop in activity and pricing pressure in North America as well as the lower overall international activity.
Revenue of $2.01 billion was 30% lower than the same period last year. Revenue decreases were recorded across the Area but were most significant in US Land and Canada where lower natural gas prices and a lack of available credit for some customers resulted in a steep drop in activity coupled with heavy pricing pressure. Canada revenue was also down due to the weakening of the Canadian dollar against the US dollar. The US Gulf of Mexico revenue decreased on weaker shelf drilling activity and lower pricing.
Pretax operating margin decreased 16.3 percentage points to 8.5% primarily due to the impact of the lower activity across the Area and the related pricing erosion.
Revenue of $2.02 billion grew 2% versus the same period last year primarily due to increased IPM activity in Mexico/Central America and higher offshore activity in Brazil. These increases, however, were partially offset by significantly lower activity across Venezuela & Trinidad & Tobago and the impact of the weakening of local currencies in the Area against the US dollar.
Pretax operating margin was down 294 bps to 18.7% primarily due to the impact of the severe drop in activity in Venezuela/Trinidad & Tobago.
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Revenue of $3.58 billion was 10% lower than the same period last year primarily as the result of the weakening of local currencies against the US dollar. Additionally, revenue decreased in Russia and the North Sea as reduced customer spending resulted in lower activity and associated pricing pressure. Nigeria & Gulf of Guinea was lower on a decrease in demand for Drilling & Measurements, Testing Services, Well Services and Wireline technologies while Framo revenue also declined. These decreases were partially offset by an increase in Libya on commencement of exploration-related activities and higher demand for Artificial Lift and Completion products.
Year-on-year, pretax operating margin decreased by 221 bps to 25.1% primarily as the result of the lower overall activity and pricing pressure.
Revenue of $2.69 billion was 3% below the same period last year primarily in the Asia GeoMarkets where decreases were most significant in Australia/Papua New Guinea and East Asia on lower activity which resulted in reduced demand for Testing Services and Drilling & Measurements technologies. Revenue for Middle East GeoMarkets was essentially flat with the same period last year.
Pretax operating margin decreased 303 bps to 32.6%, primarily due to a less favorable revenue mix in the Arabian, Gulf, and Indonesia GeoMarkets.
Six month revenue of $1.11 billion was 18% lower year-on-year. Multiclient decreased on reduced sales primarily in North America, Europe/Africa and Asia. Marine revenue declined due to lower activity and rationalization of the fleet capacity as the result of weaker market conditions. Land revenue was lower following the completion of contracts in South America, Egypt and North East Africa while Data Processing was also down primarily in Europe/Africa and in North America.
Pretax margin decreased 15.5 percentage points to 13.6% primarily due to the weaker Marine activity and lower Multiclient sales.
Interest & Other Income
Interest & other income consisted of the following for the second quarter and six months ended June 30, 2009 and 2008:
Interest income
Equity in net earnings of affiliated companies
The decrease in interest income is attributable to the significant decline in interest rates experienced during 2009 as compared to 2008.
The decrease in equity in net earnings of affiliated companies was primarily due to the results of the MI-SWACO drilling fluids joint venture between Schlumberger and Smith International, Inc.
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Gross margin was 20.2% and 31.7% in the second quarter of 2009 and 2008, and 22.8% and 31.2% in the six-month periods ended June 30, 2009 and 2008, respectively. The decreases in gross margin were primarily driven by the significant drop in activity and pricing pressure, particularly in North America for Oilfield Services.
As a percentage of Revenue, Research & engineering, Marketing and General & administrative expenses for the second quarter and six months ended June 30, 2009 and 2008 were as follows:
General & administrative :
Research and engineering expenditures, by business segment, for the second quarter and six months ended June 30, 2009 and 2008 were as follows:
The effective tax rate for the second quarter of 2009 was 19.8% compared to 20.9% for the same period in 2008. This decrease was primarily attributable to the substantially lower proportion of pretax earnings in North America in the second quarter of 2009 as compared to the second quarter of 2008 partially offset by the fact that a significant portion of the charges recorded during the second quarter of 2009 were not tax effective.
The effective tax rate for the six months ended June 30, 2009 was 20.6% compared to 20.1% for the same period of the prior year. This increase was primarily attributable to the fact that a significant portion of the charges recorded during the six months ended June 30, 2009 were not tax effective.
CHARGES
Schlumberger recorded significant charges during the second quarter of 2009. These charges, which are summarized below are more fully described in Note 2 to the Consolidated Financial Statements.
The following is a summary of the second quarter 2009 Charges:
Income Statement Classification
There were no charges in either the first quarter of 2009 or the first six months of 2008.
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CASH FLOW
Net Debt represents gross debt less cash, short-term investments and fixed income investments, held to maturity. Management believes that Net Debt provides useful information regarding the level of Schlumberger indebtedness by reflecting cash and investments that could be used to repay debt.
Details of Net Debt follow:
Net Debt, beginning of period
Excess of equity income over dividends received
Increase in working capital requirements
Capital expenditure
Proceeds from employee stock plans
Business acquisitions
Pension plan funding
Stock repurchase program
Conversion of debentures
Translation effect on Net Debt
Net Debt, end of period
Includes Multiclient seismic data costs.
Components of Net Debt
Fixed income investments, held to maturity
Bank loans and current portion of long-term debt
Other long-term debt
Key liquidity events during the first six months of 2009 and 2008 included:
During the first quarter of 2009, a subsidiary of Schlumberger entered into a €3.0 billion Euro Medium Term Note program which is guaranteed by Schlumberger Limited. This program provides for the issuance of various types of debt instruments such as fixed or floating rate notes in Euro, US dollar or other currencies.
During the first quarter of 2009, Schlumberger issued €1.0 billion 4.50% Guaranteed Notes due 2014 under this program. Schlumberger entered into agreements to swap these Euro notes for US dollars on the date of issue until maturity, effectively making this a US dollar denominated debt on which
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Schlumberger will pay interest in US dollars at a rate of 4.95%. The proceeds from these notes will be used to refinance existing debt obligations and for general corporate purposes and will increase Schlumberger’s financial flexibility.
On April 20, 2006, the Board of Directors of Schlumberger approved a share repurchase program of up to 40 million shares of its common stock to be acquired in the open market before April 2010, subject to market conditions. This program was completed during the second quarter of 2008. On April 17, 2008, the Board of Directors of Schlumberger approved an $8 billion share repurchase program for shares of its common stock to be acquired in the open market before December 31, 2011, of which $934 million have been repurchased as of June 30, 2009. Given the current economic environment, Schlumberger has temporarily suspended the share repurchase program and did not repurchase any shares during the first six months of 2009. The following table summarizes the activity under the April 20, 2006 share repurchase program during the six months ended June 30, 2008:
First six months of 2008
During the first six months of 2009 Schlumberger made contributions to its US and international defined benefit plans of $212 million and $290 million, respectively. Schlumberger currently anticipates contributing approximately $300 million to its defined benefits pension plans during the last six months of 2009.
Cash flow provided by operations was $2.1 billion in the first six months of 2009 compared to $2.7 billion in the first six months of 2008. This was primarily driven by the net income decrease experienced in the first six months of 2009 as compared to the first six months of 2008 and the significant pension plan contributions made during the first six months of 2009, offset by an improvement in working capital requirements.
Capital expenditures were $1.3 billion in the first six months of 2009 compared to $1.6 billion during the first six months of 2008. Capital expenditures are expected to approach $2.4 billion for the full year 2009.
The reduction in cash flows being experienced by our customers resulting from declines in commodity prices, together with the reduced availability of credit and increased costs of borrowing due to the tightening of the credit markets, could have significant adverse effects on the financial condition of some of our customers. This could result in, among other things, delay in, or nonpayment of, amounts that are owed to Schlumberger, which could have a material adverse effect on Schlumberger’s results of operations and cash flows. At times in recent quarters, Schlumberger has experienced delays in payments from certain of its customers. Schlumberger operates in approximately 80 countries. As of June 30, 2009, only five of those countries individually accounted for greater than 5% of Schlumberger’s accounts receivable balance and only one, where cash collections continue to be received on a timely and regular basis, represented greater than 10%.
As of June 30, 2009, Schlumberger had approximately $4.9 billion of cash and investments on hand. Wholly-owned subsidiaries of Schlumberger had separate committed debt facility agreements aggregating $3.8 billion with commercial banks, of which $2.3 billion was available and unused as of June 30, 2009. Schlumberger believes that these amounts are sufficient to meet future business requirements for at least the next twelve months.
Schlumberger’s total outstanding debt at June 30, 2009 was $5.9 billion and included approximately $0.4 billion of commercial paper borrowings. The total outstanding debt increased approximately $0.6 billion as compared to December 31, 2008. This increase was primarily attributable to the €1 billion of 4.50% Guaranteed Notes due 2014 that were issued during the first quarter, partially offset by the repayment of $0.6 billion of commercial paper borrowings.
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FORWARD-LOOKING STATEMENTS
This Report and other statements we make contain “forward-looking statements” within the meaning of the federal securities laws, which include any statements that are not historical facts, such as our forecasts or expectations regarding business outlook; growth for Schlumberger as a whole and for each of Oilfield Services and WesternGeco (and for specified products or geographic areas within each segment); oil and natural gas demand and production growth; operating margins; capital expenditures by Schlumberger and the oil and gas industry; the business strategies of Schlumberger customers; the Schlumberger effective tax rate; and future results of operations. These statements are subject to risks and uncertainties, including, but not limited to, the current global economic downturn; the current volatility in the price of oil; changes in exploration and production spending by Schlumberger customers and changes in the level of oil and natural gas exploration and development; general economic and business conditions in key regions of the world; the financial condition of our suppliers and customers in light of current global economic conditions; delay in, or nonpayment of, amounts that are owed to Schlumberger; pricing erosion; operational and project modifications, delays or cancelations; seasonal factors and weather-related events; and other risks and uncertainties detailed in our second-quarter 2009 earnings release, our most recent Form 10-K, this Form 10-Q and other filings that we make with the Securities and Exchange Commission. If one or more of these risks or uncertainties materialize (or the consequences of such a development changes), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. Schlumberger disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise.
For quantitative and qualitative disclosures about market risk affecting Schlumberger, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of the Schlumberger Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Schlumberger’s exposure to market risk has not changed materially since December 31, 2008.
Schlumberger has carried out an evaluation under the supervision and with the participation of Schlumberger’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of Schlumberger’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and the CFO have concluded that, as of the end of the period covered by this report, Schlumberger’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that Schlumberger files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Schlumberger’s disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to its management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in Schlumberger’s internal control over financial reporting that occurred during the quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, Schlumberger’s internal control over financial reporting.
* Mark of Schlumberger
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The information with respect to Item 1 is set forth under Note 13 Contingencies to the Consolidated Financial Statements.
There have been no material changes from the risk factors as previously disclosed in Part 1, Item 1A, of the Schlumberger Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Unregistered Sales of Equity Securities
None.
Issuer Repurchases of Equity Securities
Exhibit 3.1 - Articles of Incorporation of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3.1 to Schlumberger’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006).
Exhibit 3.2 - Amended and Restated Bylaws of Schlumberger Limited (Schlumberger N.V.) (incorporated by reference to Exhibit 3.1 to Schlumberger’s Current Report on Form 8-K filed on April 22, 2005).
* Exhibit 10.1 - Employment Agreement dated June 9, 2009 and effective as of May 1, 2009, between Schlumberger Limited and Dalton Boutte.
* Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
* Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
** Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
** Exhibit 32.2 - Certification Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
** Exhibit 101 - The following materials from Schlumberger Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income, (ii) Consolidated Balance Sheet, (iii) Consolidated Statement of Cash Flows, (iv) Consolidated Statement of Equity and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in his capacity as Chief Accounting Officer.
Schlumberger Limited
(Registrant)
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